Fuzzy picture

A common misconception about money market products is that they are only concerned with short-term economic developments because daily liquidity is a defining feature. But cash managers seek to gain higher yields than deposit products by investing across a longer time horizon, often out to a year. Noise in the data and news is no less impactful for liquidity vehicles than it is for bonds and stocks. Well, there’s plenty of that to go around now: the general election, impact of storms, Federal Reserve decisions, interest rates, inflation and more. It reminds me of the television static that used to frustrate viewers of everything from Saturday morning cartoons to the evening news to (most importantly!) sporting events. 

The presidential election is obviously creating significant interference, but whoever wins is likely to implement inflationary policies. To the extent that basic economic tenents still apply in this odd economy, lower taxes (especially on personal income) tend to increase spending/capital expenditures and demand. To overly simplify for the sake of space: Harris’ proposal is to reduce taxes for Americans outside of the richest 1%, while Trump’s plan is to extend or favorably modify his Tax Cuts and Jobs Act of 2017. And then, of course, is the long-term impact of expanding the national debt, which the projected fiscal plans of both will likely do, to differing degrees.

The FOMC meeting that ends Nov. 7 is more critical for the front end of the yield curve. Intriguingly, the uncertainty here stems as much from the Fed’s 50 basis-point cut in September as it does from parsing of the recent data. While Fed Chair Jerome Powell probably doesn’t have buyer’s remorse, some policymakers seem to regret the magnitude of that reduction, based on the flurry of speeches and appearances since. Yes, the data had softened, and the markets gave them the opportunity for the large cut, but few expected the combination of a rebounding jobs market and sticky inflation. We think voters would like to skip a move next week, but the supersized slash essentially demands they do something to save credibility. But if they do lower the target range by a quarter point, which we expect, they could hold rates steady in December before easing again in January and then continuing that pattern of cut/not cut for multiple meetings.

Determining that won’t be easy. The devastating hurricanes and Boeing strike clouded the October payroll report, which showed the nation added only 12,000 jobs. But the unemployment rate remained at 4.1%, indicating the labor market remains strong. Also, third quarter GDP carried the previous quarter’s banner with solid 2.8% annual growth. The large 3.7% increase in consumer expenditures was an eye-opener. Spending at that level going into the holiday season should support price pressures, which might already have paused their projected descent. The September CPI and PCE reports were little changed from August readings.

Thankfully, the picture for money markets has little obscuring “snow.” The longer the Fed takes to lower rates, the longer yields should remain elevated. Investors seem to be anticipating this. The Investment Company Institute (ICI) reported that U.S. money market funds reached a record $6.51 trillion last month. We estimate the broader liquidity market is following that trend. But it is hard to tell how everything will play out. The sooner the signal improves, the better.